1.00 A valuer was being cross examined by the Counsel. Counsel asked “Is it true that Standard Rent is always less than the market rent? “ The valuer replied “It is not necessarily true. If Standard Rent is as per Contractual Rent, it may be less that Market Rent but if Standard Rent is determined on the basis of Investment Theory, it is very lilely trhat it may be much higher than the Market Rent”. The valuer further added that even Supreme Court has supported this view. Counsel further asked “Could you give citation of said case?” Valuer replied “It was in case of Balbir Singh V/s. N.D.M.C. (A.I.R. 1985 S.C. 339).
1.10 From the above incident we can make two important conclusions. First is that valuation demands knowledge of not only engineering but also of economic and law. Second is that study and applicability of judgments is a powerful tool in hands of valuer. The valuer could defeat the Senior Counsel merely by giving on the spot citation. Obviously Courts are likely to consider Valuation Reports of such valuers as authentic and reliable.
1.20 In order that we get abstract or essence of various Courts judgments, it is necessary to study these judgments critically and with open mind.
1.21 We must understand the functioning of judicial systems. Today the politicians, press and even some of the non politician dignitaries talk of judicial activism. But their view is distrorted and it only indicates their ignorance about present judicial systems. It is not judicial activism but in reality it is public activism. Courts have only responded to the public interest writs of citizens, by passing appropriate orders.
1.22 Courts are like computers. They do not function automatically or on irs own. Some one has to feed data go get results. It is said for computers that it systems are “GIGO” viz. Garbage in and Garbage out. It is true for Courts also. If we feed correct data, we get correct results. If we feed wrong data we get wrong result.
1.23 It is therefore very essential that each Court judgment is thoroughly screened to find the facts and circumstances of said case. Applicability of said judgment to other cases can be ascertained only after such detailed study.
1.24 Let us therefore study some of the case pertaining to valuations to understand the subject in proper perspective.
1.25
Study of these cases would also enable us to understand, how misrepresentation or ignorance affects the judgment.
1.26 Study would also enable us to decide as to which judgment we should reject and on which judgment we could rely.
2.00 In following paras, we shall discuss one by one various judgments concerning valuation of immovable properties. Citations of each case are also given for ready reference.
2.10 Special Land Acquisition Officer V/s. Vishanji Mepani (Appeal No.700 of 1993 Bombay High Court). S.L. A.O. V/s. Ajay Khimji Lalan & Others. (Appeal No. 219 of 1995, Bombay H.C. )
2.20 Both these cases decided on 6-6-1996 were in respect of Land Acquisition matter. The judgment throws light on validity and comparibility of sale instances which is worth serious consideration of valuers.
2.30 Relying on Supreme Court judgment in case of Periyar & Pareekanni Rubbers Ltd. V/s. State of Kerala (1991-4SC-195) the Bombay High Court held in above cases as under :
“The sales should be bonafide transaction. It should be sale of land adjacent to the land acquired and should possess similar advantages and disadvantages. It is however necessary to establish the bonafide and genuineness of such sale instances by examining either the Vendors or Vendees and if they are not available the attesting witnesses who have personal knowledge of transactions. The original sale deed or certified copy there of must be tendered as evidence but that does not dispense with the proof genuineness and bonafide of such transactions. Mere production of such sale deeds does not dispense with the proof of genuineness thereof”.
2.40 An important lesson to be learned from this judgment is that mere production of comparable sale instance document is not sufficient. It should be backed by evidence of seller or purchaser. Valuer will have to therefore contact seller or purchaser in addition to visiting the sale instance sites for cimparision. If Claimants fail to bring these witnesses, valuer’s report based on such sale instances will be rejected by the Courts.
2.41 If Courts have held such a view in land acquisition matter it may hold similar view in all cases where comparable sale instances is the base of valuation. It may be case of Wealth Tax, Income Tax matter or Capital Gain Tax disputes.
3.00 C.I.T. V/s. Anupkumar Kapoor (125 I.T.R. 684/1980). C.I.T. V/s. Ashima Sinha (116 I.T.R. 26).
3.10 Both these judgments are of Calcutta High Court. The views expressed in both cases are identical rejecting the concept of reversionary value of land in valuation by Rental Method.
3.20 In Anupkumar’s case Court stated –
“Mr. Pal was unable to place before us any authority in support of Reversionary method of valuation. We are not able to appreciate and understand either the principle or logic behind this method applied by Valuation Officer. He has taken value of land twice. Once in arriving at figures by yield method and again in applying reversionary method. This in our view was wholly wrong”.
3.30 This is a clear case of “GIGO” viz. lack of feeding correct data to Court and hence getting incorrect views being expressed in judgment.
3.31 Two important lessons are to be learned. First is that all technical information must be fully presented to the Court through expert witness supported by authentic books on the subject. Second is that judgments can not be blindly followed. Courts are also likely to err and may express incorrect view even though judgment as a whole may be correct.
3.40 In both these cases reversionary value of land was rightly rejected not because there was no such theory in existence but because it was the case of Rent Act protected tenants who could not be ejected.
3.41 Reversionary value of land will have to be added in Rental Method where Rent Act is not applicable but Transfer of Property Act is applicable. It must be clearly understood that land value has to be added twice in cases where land would revert back to landlord. First is for value of further benefit of getting back possession of land as land does not perish like building.
4.00 Madhusudan Vora V/s. Superintendant of Stamps (Pet. No. 601 of 1980, Bombay High Court).
4.10 This case decided on 16-8-1982 was about methodology to be adopted for valuation of property of deceased for determining Court fees under probate application. The applicant’s valuer had valud the property on rental method whereas government’s valuer had valued owner occupied house on land and building method.
4.20 The Court rejected both methods and stated – “Where such property is house, its value, i.e. the price it would fetch if sold in the open market, on the date of death must be determined in same manner as it could for the purpose of estate duty, that is to say, by application of principles laid down in Rule 1-BB of W.T. Rules 1957”.
4.30 The judgment tells us that valuation for probate purposes has to be done in same manner as laid under Wealth tax Act. Rule 1-BB is now replaced by Rule 3 of Schedule III of W.T. Act and hence all valuations for probate purposes has to be done as per Schedule III of W.T. Act.
4.40 It should also be noted that in 1982 when judgment was delivered, Rule 1-BB was not applicable to Non residential premises but Rule 3/Schedule III is now applicable to non residential premises also and hence for probate purposes, value of shops, offices and factories also could be done as per Rule 3/Schedule III of W.T. Act.
5.00 K.L. Swamy (H.U.F.) V/s. W.T.O. (W.T. Appeals 39/53 and 116/130 Bangalore of 1983).
5.10 This judgment delivered on 30-11-84 by Bengalore Bench of Income Tax Tribunal is interesting from interpretation point of view of word “Practicable” seen in Rule 1-BB as well as Rule 8(a0 of Schedule III of W.T. Act.
5.20 In several cases I.T. Authorities rejected applicability of Rule 1-BB/Rule 3 on the grounds that it was not “Practicable” to apply said Rule.
5.21 Mr. Holmes has stated that ‘word’ is a skin of living thought. Hence we should study what Courts thought about the correct meaning of word “Practiable”.
5.22 The Court held : The dictionary meaning of word ‘Practicable’ is “That can be done, feasible, that can be used, that can be traversed, real, that can be used as such”. The dictionary meaning is quite clear. It can not be said that the valuation under Rule 1-BB is not ‘Practicable’ just because it gives lower value than land and building method. Stroud’s Judicial dictionary also states that word ‘Practicable’ can not be construed as meaning equitable, fair or reasonable. Looked at from any angle, it is difficult to say that Rule 1-BB does not apply to the valuation of the property in question”.
5.30 The lesson to be learned is that every word in a legal provision is important. Meaning of single word may change methodology of valuation of the property.
5.40 The same word ‘practicable’ in Rule 1-BB is also kept as basis for applicability of Rule 3/Schedule III of W.T. Act. Hence above judgment helps us in adopting correct approach for Wealth Tax valuations. It also helps to resolve disputes about non applicability of Rule 1-BB or Rule 3.
5.41 However care should be taken not to adopt the Rule 3, where it is really not ‘practicable’ to apply Rule. For example take the case of building under construction or buildings having encumbrances and easements or where only ‘urban land’ (unutilized land) is to be valued in the property. In all such cases Rule 3 can not be applied as it is not practicable to use Rule 3 for valuation.
6.00 Gouriprasad Goenka & Family (H.U.F.) V/s. Commissioner Wealth Tax (203 I.T,R. 700 decided on 3-5-91).
6.10 This judgment of Calcutta High Court is about valuing an open land affected by provisions of Urban Land (Ceiling & Regulations) Act 1976 for Wealth Tax purposes.
6.20 The Court held : To ignore the prohibitions and restrictions of the Ceiling Act in valuing a vacant land in excess and liable to be acquired by the government and to value it as freely transferable land will amount to an arbitrary act resulting in undue taxation.
6.21 In the Madras High Court judgment in case of C.W.T. V/s. K.S.R. Mudalier (150 I.T.R. 619/1984) it was held that valuation on the basis of comparision receivable under the Act was justified. Relying on said judgment Calcutta High Court further held – In our view same principles will govern the valuation of vacant land in excess of ceiling within the meaning of the U.L.C. Act, taking into account the restrictions and prohibition.
6.30 These two judgments are very much helpful in solving controversy about valuation for W.T. purposes of the excess vacant land under U.L.C. Act. The emphasis is on non transferability of such land under U.L.C. Act and also on lack of willing purchasers for such excess vacant land in open market.
7.00 Ganda Singh V/s. Ram Narain Singh (A.I.R. 1959 Punj. 147).
7.10 This was a case of claim of adverse possession where the Court held that – A person who claim adverse possession must show –
(i) On what date he came into possession,
(ii) What was the nature of possession,
(iii) Whether the factum of his possession was known to he legal claimants.
(iv) How long his possession continued. He must also show whether his possession was open and undisturbed for 12 years period. The law will not help wrong door if he obtained possession of another’s property in clandestine manner and has concealed the knowledge of his possession from the person who is rightful owner.
7.20 This judgment of tress-passers and encroachers on the property. It will also enable valuers to value encroached land differently than unencroached land.
8.00 Smt. Purificacao Fernandes V/s. Dr. Hugo Menezes A.I.R. 1985, Bombay 202 (Panaji Bench).
8.10 This case is in respect of “Mense Profits”. It gives meaning and basis of its determination.
8.20 Discussing various judgments Courts held : “It would appear therefore clear that Mesne profits are a sort of compensation that a person who is in wrongful possession of others property has to pay for such wrongful occupation to the owner of the land. It further appear that Mense profits are a compensation, which is penal in nature. Mense profits correspond to the profits which the person in wrongful possession is receiving for his wrongful occupation of the land. No where mesne profits are linked with any benefits that the owner of the land may get from the said land. The Court also cited Supreme Court judgment. A.I.R. 1963 S.C. 1405 in case of Fateh Chand V/s. Balkishan Dass.
8.30 The above judgment would help the valuer to value the property which is in wrongful possession of the person or tress-passer. It will also help in ascertaining correct basis of claim of damages from person in wrongful possession,
9.00 C.W.T. V/s. S. Venugopal Kona 1977 (109 I.T.R. 52).
9.10 In this case Madras High Court held – In respect of any incomplete construction, normally there can not be any market value as on successive valuation data on the basis of progress in construction work and the only manner in which the value of such incomplete construction as on different valuation dates could be carried out, will be by finding out the actual amount spent on the construction as on different valuation dates.
9.20 This concept may be true only for valuation under Wealth Tax Act and may not hold good for valuation for loan purposes or sale purposes.
10.00 C.I.T. V/s. Radhye Mohan 1985 (153 I.T.R. 399)
10.10 In this case Punjab & Haryana Court held – It is well settled that fair market value of property can be determined either by land and building method or by rent capitalization method. In case of a part of the building on rental and part occupation of owner, it can not be held that the determination of the valuation of the building by rent capitalization method is not correct.
10.11 In another case C.I.T. V/s. Prem Narain Tandan 1984 (145 I.T.R. 359). Allahabad High Court held that there is no error in approach of Tribunal in determining value of the building (3/4 was rented and 1/4 portion was owner occupied) on the basis of annual rent.
10.12 In one more case Gauhati High Court held similar view. Vide Controller of Estate Duty V/s. Bijaykumar Khandelwal (108 I.T.R. 864).
10.20 All these three judgments are another example of “GIGO”. Valuation of owner occupied portion by rental method or by Rule 3 may be proper for Wealth Tax purposes but it is not proper to adopt rental method for estimating value of owner occupied premises in open market. Land and building method or comparable sales approach would be more appropriate.
10.21 In this respect 1978 judgment of Delhi High Court is more appropriate. Vide Wenger & Co. V/s. D.V.O. (115 I.T.R. 648). It was held that owner occupied portion should be valued on comparable sales method and rental portion on the basis of rental method if building is partly rented and partly owner occupied.
11.00 Mathure Prasad V/s. State of W.B. 1970 (3 S.C.C. 730).
11.10 In this case Supreme Court held – Where a large area of land in an urban locality is sought to be acquired in determining the market value, the method of belting is appropriate. It is common knowledge that the lands having frontage on main roads in urban areas are always more attractive than the lands which have no such frontage.
11.11 As against this judgment, Gujrat High Court in case of Fabric Pvt.Ltd. V/s. S.L.A.O. held in 1975 (2 Guj. LR 319) that “The method of valuation by belts is arbitrary and artificial”.
11.12 In case of Ananthan Pillai V/s. State of Kerala (1961-Ker-LJ-723) Kerala High Court held – Belting method can be resorted to only in case where extensive lands having road only on one side is to be valued. It will not be suitable in cases where the plot acquired has roads and lanes on its three sides.s
11.13 In case of Mirza Noushrwan Khan V/s. Collector (A.I.R. 1974 S.C. 2247). Supreme Court held – There is no doubt that when the Court has to be deal with valuation of an extensive plot of land in a city, the strip of land that adjoins an important road will have a higher value than what is in the rear for obvious reasons of potential user or commercial exploitation. While no general principle can be laid down in these matters, local circumstances guide the Courts.
11.20 Above four judgments gives an excellent idea about valuation of large size plots andCourts views on age-old “Belting Theory”.
11.21 We can surmise from these judgments that valuation by belts is not only artificial but also arbitrary. It is very unlikely that value of plots in second belt would fetch 2/3 price of front belt and that value of plots in third belt would be 1/2 of that in front belt. There is every possibility that all plots in 2nd and 3rd belt would fetch 80% of the value of plots in 1st belt. Court cautions us against fixing general standards of evaluation and suggests that prices should be determined on the basis of local circumstances.
11.30 It is high time that belting theory is now critically reexamined by studying actual sale prices of sub plots in the layouts of larger holdings.
12.00 There are several other judgments also which may interest practicing valuers. Some of these are given below with issues connected with such judgments.
12.10 C.B. Gautam V/s. Union of India (199 I.T.R. 530). In this case Supreme
Court decided (1993) that opportunity of being heard should be given to the parties before passing the order.
12.11 In case of Kishore Shahani V/s. Appropriate Authority (73 Taxman 58 Bom). Supreme Court held (1994) that C.B. Gautam’s case provides for effective hearing and not empty formality. It also held that opportunity given was not a real opportunity but merely a pretence and empty formality and hence order was arbitrary and violative of principles of natural justice.
12.12 Similar view was held by Gujrat High Court in 1979 in case of C.W.I. V/s. Vimlaben B. Patel (118 I.T.R. 134).
13.00 There are number of judgments on approach to be adopted in selecting methods of valuation.
13.10 Udayan Girija Prasad V/s. SLAO, 1976 (17 G.L.R. 668). In this case Gujrat High Court held – The property in question should ordinarily be valued as a whole composite unit. Aggregate of valuation of its different componants such as land and structure would normally not given an idea of the market value.
13.11 In case of Premchand V/s. I.A.C. 1985 (153 I.T.R. 774). Karnataka Hihg Court held – Other methods of valuation must be resorted to only when the Fair Market Value can not be determined by applying comparable sales method.
13.12 In case of S. Neelaveni V/s. C.I.T. 1980 (125 I.T.R. 665). Karnataka High Court held that it would not be correct to say that rental method has no application at all in determining the valuation of the self occupied residential house. It was also held that adoption of average of value ascertained by the rental method and land and building method was appropriate for self occupied house as well as for building under permissible occupation.
13.13 Shri. A.K. Lal, Author of Book “N.O.C. for property purchase” says in his book p.210 that “Even in case of fully rented building, mechanical application of capitalization of net rent by 10% or 12% may given ridiculous or even regative value of rent is very low and outgoings are substantial. A valuer has to take a comprehensive views of peculiar facts and circumstances prevailing in each case and thereafter proceed to apply a method of valuation or not a combination of different method.
13.14 In case of V.C. Ramchnadran V/s. C.W.T. 1980 (126 I,T.R. 157). Karnataka High Court held – We are unable to agree with the views expressed by Punjab & Haryana High Court in case of Jaswant Rai V/s. C.W.T. 1977 (107 I.T.R. 477) that if there are two valuations of the same property arrived at by two different methods, the one which is favourable to the assessee should be accepted. It further held that principles applicable to interpretation of taxing statutes can not be imported and applied to the valuation of the property in a given case as the same constitute a question of fact. If there are more than one valuation of same property, the one which is reasonable and nearer to the correct market value, having due regard to all the relevant facts and circumstances of the case alone should be accepted. We are unable to accede to the submission that in cases where the value is ascertained under more than one method, the lowest should be accepted.
13.20 All these judgments and views makes an interesting and important reading. We can summarise these as under.
13.21 There are no iron bar rigid rules for selection of methods of valuation of immovable property. The valuer should select the method which would give value very close to the correct market value of the property.
13.22 Comparable sales method is best suited for determination of fair market value failing which other methods could be adopted.
13.23 Value arrived at by average of two different method of valuation is not acceptable to the Court.
13.24 Method favourable to assessee has not to be selected but method most appropriate under the facts and circumstances of case has to be adopted.
13.25 Wholly tenanted premises by rental method of valuation may give ridiculous or negative value if rents are low and outgoings high. In such a case value by comparative method should be worked out instead of rental method. Similarly for owner occupied house, value as a whole composite unit is preferable instead of land and building method.
14.00 There are innumerable other situations where value is in a dilemma about the proper approach for valuation of properties. We need not wait for Court’s decision in such matters. We discuss it from all angles and arrive at solution ourselves. Such special situations requiring in depth discussions are as under.
14.10 Valuation of properties falling under coastal area zones or beach zones where no construction is permitted within 500 meters distance from High Tide Line.
14.11 Valuation of Transfer of Development Rights (T.D.R.) or floating F.S.I.
14.12 Valuation of properties falling close to Protected Historical Monuments. As per policy framed under Preservation of National Monumental Structures Act, no construction is permitted within 100 meters of such monuments and only limited construction is allowed in next 200 meter distance. N.O.C. is granted by Archeological Department of Central Government, New Delhi.
14.13 Valuation of factories which are affected by Government’s pollution policy and Court’s orders. There are Acts for Preservation & Control of Pollution of Air and Water environmental conditions. It calls for installation of treatment plants and use of prescribed fuel.
14.14 Valuation of properties at Hill stations also needs discussion. Regional Rules restricts F.S.I. to 0.125 or 0.25, in such areas. Minimum plot size is fixed at 1000 Sq.Mts/Dwelling.
14.15 Valuation of Time Sharing Rights at Holidays Resorts. T.S. Rights are novel concept in our country. They may be seasonal, non seasonal, transferable or perpetual.
15.00 There may be many more such situations where valuer needs guidance about proper methodology of valuation. Let us keep studying and discussing these issues till we reach final solution or satisfactory conclusion. Let us make it a part of continuous education programme. There will never be any end to learnings in this fast progressing world.sss
23-1-1997
CVSRT/Anand
Articles on Valuation of Real Estate 